Semiconductor Manufacturing International (HKG:981) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Semiconductor Manufacturing International Corporation (HKG:981) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Semiconductor Manufacturing International

How Much Debt Does Semiconductor Manufacturing International Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Semiconductor Manufacturing International had US$7.84b of debt, an increase on US$6.16b, over one year. However, its balance sheet shows it holds US$14.6b in cash, so it actually has US$6.79b net cash.

How Strong Is Semiconductor Manufacturing International's Balance Sheet?

The latest balance sheet data shows that Semiconductor Manufacturing International had liabilities of US$6.41b due within a year, and liabilities of US$7.45b falling due after that. On the other hand, it had cash of US$14.6b and US$1.25b worth of receivables due within a year. So it actually has US$2.03b more liquid assets than total liabilities.

This short term liquidity is a sign that Semiconductor Manufacturing International could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Semiconductor Manufacturing International has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Semiconductor Manufacturing International grew its EBIT by 227% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Semiconductor Manufacturing International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Semiconductor Manufacturing International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Semiconductor Manufacturing International saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Semiconductor Manufacturing International has US$6.79b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 227% over the last year. So we are not troubled with Semiconductor Manufacturing International's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Semiconductor Manufacturing International (at least 1 which is concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.